Federal Housing Administration Said to Take Taxpayer Subsidy

The Federal Housing Administration will take a taxpayer subsidy for the first time in its 79-year history after efforts to improve its bottom line failed to offset losses on loans backed during the housing bubble, according to three people familiar with the matter.

The government mortgage insurer will draw the money from the U.S. Treasury to shore up its insurance fund by Sept. 30, the end of the current fiscal year, said the people who asked not to be identified because the action hasn’t been announced.

Federal budget officials are working to determine the exact size of the cash infusion, the people said. White House officials projected in April that the FHA would need about $1 billion. The agency, which is required to keep enough money on hand to cover all projected future losses, has authority to take the money without prior approval from Congress.

The FHA’s need for aid could spur lawmakers to move more quickly to shrink the agency’s risk and its footprint in the mortgage market. Representative Jeb Hensarling, the Texas Republican who leads the House Financial Services Committee, urged swift passage of his bill to largely limit FHA coverage to first-time borrowers purchasing moderately priced homes.

“Over the years, the FHA has strayed far from its original mission,” he said yesterday in an e-mailed statement. “It has become the nation’s largest subprime lender.”

Bipartisan Bill

Hensarling’s panel passed his bill in July, setting the stage for a vote by the full House. The Senate Banking Committee in July approved a bipartisan bill that would set a floor on premiums the agency charges and require it to hold more money in reserve.

The FHA raised the amount it charges borrowers to insure mortgages against default and tightened underwriting after an independent actuary predicted in November that the insurance fund would require a $16.3 billion subsidy. Those changes, coupled with rising home prices, helped shrink the gap to the $1 billion projected in April.

Since then, rising interest rates have reduced the volume of new business, potentially magnifying the projected shortfall because revenue from new loans is used to cover losses on defaulted mortgages. Projections show the FHA’s finances will improve over time and the agency won’t require a subsidy in fiscal-year 2014.

Appropriate Steps

The FHA has already taken appropriate steps to deal with its funding issues, said Julia Gordon, director for housing finance and policy at the Center for American Progress, a Washington advocacy group with ties to the Democratic Party.

“They’re on this,” Gordon said yesterday in a telephone interview. “Along with premium increases, they’ve also changed policies to improve performance going forward.”

Addie Whisenant, press secretary for the Department of Housing and Urban Development, declined to comment. FHA is part of HUD’s Office of Housing.

The FHA’s shortfall stems largely from loans it backed from 2007 to 2009, when it expanded its book of business as private capital evaporated. Those loans alone are projected to cost the agency $70 billion.

FHA Commissioner Carol Galante said in April that the agency’s need for funds was driven entirely by losses from reverse mortgages. The FHA backs 90 percent of such loans, which enable homeowners age 62 or older to withdraw equity and repay it only when their homes are sold. Declining home prices have left the agency holding properties worth less than the amount borrowed.

The FHA is mitigating losses in the reverse mortgage program with new requirements for financial assessments of potential borrowers, new limits on the amount of equity that can be withdrawn, and mandatory escrow accounts for payment of insurance and taxes on the properties.

The agency insures $1.1 trillion worth of mortgages and backs about 15 percent of the U.S. loan originations for home purchases, almost quadruple the 4 percent share it had in 2007.

Hensarling’s bill is H.R. 2767.

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